Union Budget 2025: Tax cut meant to address ‘angst’ and to kickstart a slowing economy, says Finance Secretary

Union Finance Secretary Tuhin Kanta Pandey.
| Photo Credit: The Hindu

The Centre’s decision to significantly slash the income tax payer’s burden was aimed at addressing some “angst” that the government had noticed in recent months as well as to give a fillip to the economy’s weakening growth impulses with a broad-based boost to demand, savings, and investments, Finance Secretary Tuhin Kanta Pandey said on Sunday (February 2, 2025).

While the government will forego ₹1 lakh crore of revenue through the move to make annual incomes up to ₹12 lakh tax-free and rejig the tax slabs and rates across the board, Mr. Pandey told The Hindu that in aggregate terms, this will spur the economy in a manner which “probably can’t even be fathomed”.

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“The fact is that there was also angst, which I think the government noticed. The second is also the economic reason [slowdown]. This is a good and a new deal,” the Secretary said.

‘Trust people’s wisdom’

“Normally, we say an investment multiplier is more than the consumption multiplier… But the state of economy that we have today, it requires all kinds of engines to be fired. Therefore, agnostic of that, I think we should really be trusting the people’s wisdom, whatever they want to do. It will come back and the economy will get a boost,” he said, adding that “Lakshmi baantne se badhti hai (distributing wealth also increases wealth)“.

“If the money comes to the government, it will be put in a certain way. If the money goes back to people, the money is distributed in a more equitable way and I’ll explain why. If I give the money to you, you have three choices. You can consume, as per your choice — be it on travel, dining, services, or consumer durables — which will be much more broad-based and not just be in steel and cement,” he pointed out.

Save, spend, invest

If people choose to save instead of consuming, that would also help, as India’s savings rate needs to go up and bank deposits need to grow to support credit flows to critical segments like micro, small and medium enterprises (MSMEs), the Finance Secretary said.

“Third, you may choose to invest directly. Have we forgotten about household investments? Millions of houses are being made or rebuilt by people on their own across small towns. They raise the money, order things on their own, get a contractor to build or rebuild their own houses. That’s how it used to be and still is in many places,” Mr. Pandey underlined.

Asked if there was an assessment of how much this tax stimulus could lift growth, the Secretary said: “What kind of multiplier will operate will depend upon the mix… It could be consumption plus investment in some cases. In either case, in the current situation that we are here, whatever you would do, it helps.” Consumption will spur demand and help private investments, savings will boost bank deposits, and so on, he explained.

“So it is a relief and it is also a policy choice that the government has exercised in order to see that this extra disposable income will come back to the economy and lift the spirits. This would enhance the weakening growth engines of demand and address the slowdown concern too,” the Finance Secretary said.

RBI rate cut possible

Asked whether an interest rate cut by the Reserve Bank of India (RBI), whose Monetary Policy Committee meets this week, will help revive growth further in tandem with the Centre’s stimulus, Mr. Pandey said: “Let’s wait for Friday. They will decide autonomously. I will not hazard any guess on what the RBI will do but its stance has been that inflation is coming down… Now, what is the level they will be comfortable to announce a rate cut, is for them to decide.”

The Budget, he said, is “absolutely non-inflationary”, with the fiscal deficit reined in at 4.4% of GDP. He dismissed suggestions that public capex has not been pushed this time, saying they “reflect inadequate understanding”.

“Our effective capital expenditure is kept at ₹15.48 lakh crore, not just the ₹11.21 lakh crore to be directly spent by the Centre, as government funding will help States’ capex too. On top of that, there is another ₹5 lakh crore from public sector firms, so total capex is about ₹20 lakh crore,” he explained.